Of course, there is no shortage of toxic financial assets. They are clogging the financial system and putting incredible pressure on global banks.

Typically, such things get bought up. But, with little visibility and the complexity of modern financial instruments, it's been tough to attract bottom-fishers into the market.

Yet, according to U.S. Treasury Secretary Timothy Geithner, it's important that private operators swoop in.

Most experts now believe that in order to recover, banks need to find a way to move their "toxic assets" off their balance sheets to stop the bleeding of quarterly writedowns.

The idea of establishing a "bad bank" to buy all that crap is gaining some traction in Washington, but Dennis Kneale proposes an alternative solution in a column on CNBC.com: "Turn all those rotting securities into an ETF, add a boost from government and let investors put a real, truly liquid value on 'em."

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Investors should not read too much into the Dow's nearly 400-point drop Tuesday. What they should concentrate on, in the view of a pair of economists, is the mechanism the U.S. Treasury uses to price toxic assets.

The above is the most important 'unknown' in the U.S. Treasury's financial stability plan, so says economist David H. Wang -- how toxic assets that are clogging banks' balancing sheets and restricting credit -- will be priced.

"Will the United States government set-up a clearinghouse? Or will they design some type of open outcry, or managed open outcry? These are the key unknowns," Wang said. "Treasury Secretary Geithner and his staff cannot rush this decision, but on the other hand they cannot take two quarters to developed it. They have to announce the structure of the pricing program within a couple of weeks. I cannot underscore enough the importance of this pricing methodology. It will be the biggest factor in whether the credit system recovers, or something much worse occurs."

Shares of Bank of America (NYSE: BAC) plunged over the past month on concerns about write-offs from its Merrill Lynch unit and fears that the firm might be nationalized to keep it from failing. Over the 30 days ending on Thursday, the stock moved down 60% before recovering on Friday by rising 26% to $6.13.

Ken Lewis, the bank's CEO, has made public comments that his company is fine and will not need more capital from the government. Skeptics argue that he is simply trying to keep his job.

Last week I posted on a colleague's plan to clean up the financial toxic waste dragging down our economy. The basic idea is for the government to buy the failed mortgages buried inside that toxic waste -- meaning that the owner of a toxic waste bundle would get that cash and not incur any loss from a failed mortgage for the next three years. The FDIC would buy the mortgages at face value less a $5,000 processing fee. In his plan, the FDIC would use its successful techniques to restructure those mortgages to keep people in their homes.

Why is this a good idea? My colleague's plan would unfreeze the market for the toxic waste, which might then be valued at 90% of its face value. And once an active market for trading the toxic waste emerged, we would no longer need to rely on mark-to-market accounting to estimate its worth. Suddenly, the toxic waste would become worth something that private investors would be willing to buy.

My colleague -- who worked with me on several consulting projects 25 years ago -- has an exceptional background. He's semi-retired and does not have a blog of his own. He retired from a military career, has five degrees including a Doctorate in Business Administration (DBA) from Harvard Business School (HBS) and completed consulting assignments with 74 companies worldwide. Not surprisingly, his plan has gotten some reactions and here are his thoughts on some of those comments:

You have to appreciate the cleverness of this era's financial humor. (Note that I said, appreciate the cleverness, not love, or enjoy. That's because, depending on your perspective, the humor is either on-the-mark, or not that funny. But that is part of the subjective nature of humor.)

One joke making the rounds:

Question: What's the capital of Iceland?
Answer: $25.

Another: In the old days, banks lent money to people. These days, people lend money to banks.

New York Times (NYSE: NYT) columnist and Nobel Prize-winning economist Paul Krugman discusses bank capital and lending in his most recent column, and argues that the apparent likely Obama administration fix for the banking sector -- a combination of U.S. government purchase of toxic assets and guarantees against losses on other assets, each on terms favorable to the banks -- represents a lousy deal for the U.S. taxpayer, who'll end up "footing the bill for rescuing the banks."

Oppenheimer analyst Meredith Whitney -- one of the handful of people to predict the current mess -- says that allowing banks to move "toxic" mortgages off their balance sheets is only part of the solution to the current mess.

Ms. Whitney told Fortune that a "bad bank" plan would help banks improve their balances sheets but that the more serious problems would still be there: The declining economy will cause an ever-increasing percentage of good assets to go bad while simultaneously killing demand for the other services banks offer.

In the economic analysis field, there are forecast revisions, and then there are 'gappers,' and Wednesday's IMF revision is definitely a gapper.

The International Monetary Fund now expects 2009 global GDP growth to total a scant 0.5% - - down from the 1.7% GDP growth it forecast in November 2008, as the bad debt-led U.S. recession contracts economies from Germany to Russia to emerging markets in Asia.

Further, the IMF also now sees 2009 bank losses from toxic assets totaling as much as $2.2 trillion, up from its previous $1.4 trillion estimate announced in October 2008.

Washington Post business columnist and Pulitzer Prize-winner Steven Pearlstein reminds investors that a complex financial crisis will not be solved by a simple solution.

Hence, Pearlstein's offered a four-part solution that he believes will get the United States back on the road to financial health.

The first involves a limited guarantee against default by the federal government for packaged loans that circulate in the "shadow" banking system, such as the way Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) do with conventional mortgage-backed securities. The FDIC is working on plan to do the above, he said, funded by either bank fees or via a modest contribution from the $700 billion TARP.

Second, the FDIC, via a new program that covers $1,000 in refinance closing costs, should be able to encourage more banks to renegotiate at-risk mortgages, greatly reducing the number of home foreclosures that are at the root of the bad bond/toxic asset pipeline.

Comment: The view from here argues that had the FDIC under chairwoman Sheila Bair been allowed to implement a version of the above program a year ago, the U.S. would have been that much closer to reducing foreclosure rates. The previous presidential administration did not act swiftly on Bair's proposal -- an unmitigated policy error that the current administration inherited. Hopefully, the Obama administration will correct it.

Can the U.S. government run $1 trillion budget deficits for two, three years? Indeed it can, Financial Times columnist Martin Wolf argues, and the deficits can even be higher, for a while. After that, there's more work ahead.

The specter of $1 trillion budget deficits may be vociferously opposed by Republicans and other economic conservatives, but Wolf, in so many words, says what other choice does the United States have? What would be the alternative? Simultaneously raising taxes now to lower the deficit? Hardly prudent. Doing nothing? Another dreadful idea. So, it's prime the pump, or sit there at the well and await nothing.

Up ahead: two bigger tasks

What's more, Wolf sees two additional tasks (structural changes) that are just as important to the goal of U.S. economic recovery -- but that may be even harder to implement: removing toxic assets from the banking system and reducing the U.S.'s structural current account deficit (the trade deficit).

The first is the forced write-off of bad assets, fiscal recapitalization of the banks, or debt-for-equity tactic, and it should be done comprehensively and quickly. Slow, gradual bad-debt reduction is not the correct policy, Wolf argues, as it would delay the economic recovery.

In the heat of the moment very often bad decisions are made. According to OECD (Organization for Economic Cooperation and Development), the decision by the U.S. Treasury to shift the TARP money away from buying toxic bank assets to simply giving money to the banks was the wrong move.

OECD outlined steps to follow to return the banking industry to a sound footing: First, bank assets must be guaranteed to avoid a run on the banks. Second, toxic assets must be removed from bank balance sheets. This is the step that was not done. According to OECD, the failure to remove toxic assets from bank balance sheets only serves to prolong the problem and make it more dangerous. These toxic assets can get worse through more defaults, thus making it necessary to inject more funds into the banking system. It's like holding a stock that keeps dropping and dropping and your margin calls become larger and larger.

So far the Fed and the U.S. Treasury have failed to clear toxic assets from bank balance sheets. This is an absolute must if our banking system is ever going to return to normal and bring back trust in the system. Just ask yourself, would you want to invest in a business when you don't even know what "bad assets" are being carried on the books? Who knows, maybe the value of the toxic assets are more than the bank is worth, in which case it should be shut down. At some point, someone will have to "bite the bullet" and clean up this mess. Congress, the Fed and the Treasury must put a stop to the practice of allowing banks to keep some of their transactions "off the books." That's what got us into this crisis in the first place. We need full transparency from here on or we will never be able to trust our banks again.

What are your thoughts on this?

Last Friday the Fed announced a $200 billion dollar program for buying toxic assets from banks to help them stay afloat. Yesterday the New York Federal Reserve Bank started a new $500 billion dollar program for buying toxic securities from Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM)

Since Friday the yield on 30 year agency mortgage securities dropped from 208 basis points over Treasuries down to 190 basis points. This has had the effect of lowering mortgage rates. The rate on a 30 year fixed mortgage has dropped to 5.3% from 6% last November.

The Fed is using four firms to conduct these transactions. They are: BlackRock (NYSE: BLK), Goldman Sachs (NYSE: GS), Pimco and Wellington Management.

As was stated previously, the Fed has not disclosed the details of any of these repurchase programs. They are saying that they will be doing this "as the need arises."

A dramatic effect of this new Fed action is the sharp drop in US Treasuries, which today are down another 217 basis points on the 30 year March futures contract. Since last Wednesday the March 30 year bond futures contract has dropped from 141 down to 133 for a drop of about 800 basis points or $8,000.

I guess we can assume from all of this that Freddie Mac, Fannie Mae and the banks are in much deeper trouble than the Fed led us to believe last November. The Fed is not calling these bailouts any longer. They are just going ahead with these massive programs, programs that, by and large, investors and the public are not aware of.

What are your thoughts on these programs?

The year 2008 saw a slew of discount M & A (mergers and acquisitions) deals, most of them below book value. Among these were Wachovia and National City. Capital One Financial bought Chevy Chase Bank at .64 times book value.

If you look at the financial landscape for 2009, some names are already popping up for distressed sales, such as Citizens Republic Bancorp (NASDAQ:CRBC), Huntington Bancorp (NASDAQ:HBAN), Midwest South Financial (NASDAQ:TSFG) and Colonial Banc Group (NYSE:CNB).

It seems that we will see a continuation of the purging of bad bank assets in 2009. Banks use a practice of good/bad assets and move their worst assets to a separate company that absorbs the assets' future losses. Then the original bank emerges as a healthier, deleveraged institution.

All of this is taking place under the radar and it is difficult for investors and the public to know which banks are using this practice. When deleveraging becomes unmanageable, the federal government may need to step in and absorb a bank losses to avoid the bank's failure.

Do you believe the financials are a place to invest in 2009?

Mark to market means that financial assets are marked up or down based on the their price on a given date. For example, brokerage houses routinely do this when they issue your monthly statements. Let's say you buy 100 shares of a $10.00 stock and it drops to $5.00. Your brokerage statement will show your net asset value on this security as $500.00.

Now we come to banks. And here is the tricky part. There is an SEC rule that says that banks must use the mark-to-market procedure to price their assets. There is also a clause that says that they SEC can suspend the rule if it so chooses. This process of mark to market is now creating a major dilemma for most banks. As an example: the Federal Home Loan Bank of Atlanta had three securities showing an $87.3 million loss and had to take that write down. This is a toxic asset that nobody wants. The few investors who would purchase it are throwing in "fire sale" bids in the hope of buying it "on the cheap." The prices of these assets are so wild that there is often a 2000 to 3000 basis point between bid and ask.

The bottom line is that banks are reluctant to sell the assets for virtually nothing and are leaving them on their books. This creates an extremely dangerous situation for two reasons: 1.) taking the loss at mark to market wipes a large chunk of bank equity and hence their lending power, and 2.) there is no way to determine the true value of the bank's stock price.

The SEC is meeting in early January to review this matter and it will be interesting to see what they come up with.